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  • USD/CHF dropping like a stone, with lots factored into the strength of the Swiss franc, including the ECB and the euro.
  • Risk appetite has been built on a house of cards and by investors wearing their rose-tinted glasses.

USD/CHF is currently trading at 0.9552 having slipped from a high of 0.9624 to a low of 0.9545 on the day so far. The US dollar is under pressure and risk appetite, albeit, built on a house of cards, remains robust broadly speaking. 

The sell-off in the safe-haven USD can be linked with the sharp recovery in global equities and a number of key emerging market currencies. 

Coupled with massive amounts of fiscal and monetary stimulus programmes throughout the world, all of which at some point will be have to be paid back, investors, potentially in a fear of missing out, prefer to chase the V-shared recovery narratives instead of staring in the face of the elephant in the room. 

Elephant in the room ignored for now

The global pandemic and relations between the US and China have been worsening throughout the duration of the recovery in global financial and commodity markets and the US dollar’s drop. 

The 16th March is when COVID-19 new worldwide cases started to rally and the US dollar topped soon after on the 20th March. The S&P 500 index bottomed on 23rd March and has broadly held an upward trajectory ever since, recovering back to the 4th March highs to complete a 78.6% Fibonacci retracement of the 2020 crash. 

While worldwide cases have been on the rise, key economic powers have insisted on reopening, with China’s V-shaped recoveries in some of the key data encouraging decision-making leaders to dip the toe. 

Prospects of pent-up demand have enthused investors to buy-up what they can while they still can, forcing the bid through while the revived industry has done the main leg work in the commodity markets. As a result, we have seen sizeable unwinds in safe havens, but not the Swiss franc. 

EUR/USD and USD/CHF is described as upwards of negative 95%

CHF is closely correlated to the euro considering the close proximity of Switzerland and business relations. The correlation between the two currency pairs, EUR/USD and USD/CHF, is described as upwards of negative 95%. On a 1 month view, the EUR has outperformed the USD by a very respectable 2.1% and the CHF has followed suit, rising some 2.5%.

Also, it should be noted that USD/JPY has seen a continuation of the bull-run which has been a significant factor, for not only markets in general as the pair tests out the 109 handle, but for CHF/JPY as well.

The recoveries are built on a house of cards and investors who have not been buying the recovery narrative will be looking for CHF as a safe haven. CHF is an alternative to the weakening yen and investors will have also been enthused by political developments in Europe, especially after today’s European Central Bank outcome. 

As analysts at Rabobank have noted, the US dollars fall had “coincided with the perception that the EU may finally have taken steps to reduce risks of fragmentation’. 

If European officials can follow through and build a more integrated EU, this would likely be seen as a game-changer for political risk in the Eurozone. In turn, this could bolster the long-term value of the EUR.

ECB pulls a big one

Meanwhile, both the euro and CHF got a boost today when the ECB left key policy rates unchanged but went big by boosting the PEPP by €600 billion.

Christine Lagarde, the ECB’s governor, stating that the economy has shown signs of bottoming out also said that the “PEPP has prevented a downward spiral in financial markets.”

Hope built on a house of cards

Investors looking at the global financial market’s landscape through rose-tinted glasses may want to think twice about chasing the bid in risk assets. As analysts at Rabobank have warned, they “also see risk that eventually investors will accept that US/Chinese tensions, on-shoring and heightened unemployment around the globe will impact supply chains, consumer demand and company valuations.”

While the bull market may have further to run in the near-term and the up-move in EUR/USD further to go, we remain sceptical at present that we have witnessed an enduring turn in the direction of EUR/USD.

However, considering the CHF’s close correlation to the euro and for its safe-haven qualities, its downfall may not be as aggressive as the euro’s going forward. 

USD/CHF levels